Fitch have affirmed the Friends Life Group’s Insurer Financial Strength (IFS) rating at ‘A+’ because of the agency’s “continued expectation that the group will achieve substantial efficiencies” in the year ahead. The outlook on the rating is stable.
Fitch said the groups synergies between Friends Life and the AXA UK Life businesses, which was acquired in September 2012, will continue to enhance the cash generation of the group.
They also noted the groups cost cutting success. At half-year 2011 the group had achieved £24 million of its planned annual cost saving (£112 million by 2013). The ratings agency said that failure to keep up with its savings targets would put negative pressure on the group.
Despite regulatory capital falling by £300 million (the result of a £350 million dividend paid in early 2011) last year, Fitch continues to view the groups capitalisation as strong.
Fitch added that they had concerns about the groups low UK profitability. However Friends Life have already taken this into account by reducing its costs and developing its annuity capabilities, with the aim of increasing its retention of pension savings policyholders at retirement to 50 per cent.
The agency finished by adding that an upgrade is unlikely in the near future given that the company’s current rating already factors in Fitch’s expectation of improved profitability.
“The ratings may be downgraded if Friends Life is unable to improve its profitability, achieving an annual operating return on assets in excess of 0.40% as calculated by Fitch, and a material reduction in the overall payback period for new business.”